BoE adopts lower for longer rate policy

The governor of the Bank of England has signalled a sharp slowdown in Britain’s economy, dampening expectations of an early interest rate rise in the battle to curb inflation.

Mervyn King said that inflation was likely to fall back to its 2 per cent target next year, given the deterioration in the state of the economy. He stressed the temporary nature of recent double-digit rises in the cost of food and energy, coupled with the government’s value added tax (VAT) increase.

A rise in unemployment to more than 2.5 million emphasised the likelihood that wages would be kept in check, he said after publication of the bank’s quarterly inflation report.

The governor’s message was expected to cheer the Treasury, which wants rates maintained at historic lows while it pushes through public-sector spending cuts.

An official spokesman for No. 10 Downing Street confirmed that the government would stick to its austerity plans.

“What we need is an economic policy which sees a rebalancing in the economy, and that’s what we are doing through our deficit reduction plan," he said, “As a result of that plan, interest rates should be able to stay lower for longer."

Mr King said in the report: “The projection for four-quarter growth is weaker than in November for much of 2011, following the weak data around the turn of the year." He added: “The strength of the recovery is likely to be dampened by the fiscal consolidation."

He denied that the BoE’s monetary policy committee had lost control of inflation, but conceded that uncertainty over the next 12 months had led to differences of opinion on the committee.

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He said that, on the timing of the next move up in rates, “some people are running ahead of themselves", and that: “It is clear that at some point the bank rate will have to go up. Anyone making long-term financial decisions should not expect bank rate to be at these low levels indefinitely. But the judgment about timing . . . is a difficult one." He also said that the BoE would lift its base rate before unwinding its quantitative easing program.